Tesla Talking $1 Billion Deal With Toyota?


Tesla Motors CEO Elon Musk said Wednesday that the Silicon Valley EV maker is negotiating a potential $1-billion deal with Toyota. He announced the potential deal – which  would be by far the largest in the EV maker’s short history – during a conference call with analysts on second-quarter earnings. In the call, Musk said the just-ended second quarter was the best three-month period in Tesla’s history with “tremendous” demand for the Roadster sports car and the upcoming Model S sedan – both battery-electric vehicles – as well as the signing of a $100-million EV power systems deal with Toyota. Tesla also is “in discussions with them for a deal that is an order of magnitude larger than that,” he said of the company’s relationship with Toyota.

A Tesla executive later confirmed to AutoObserver that by “order of magnitude,” Musk indeed meant that the 8-year-old Palo Alto, Calif., company was discussing an unspecified $1-billion deal with the world’s largest automaker. Despite a record $58 million in revenue, Tesla posted a bigger loss than a year ago. Its net loss of $58.9 million, or 60 cents a share, for the period, compared with the year-ago quarter’s loss of $38.5 million a year earlier. Musk said the loss came as continued research-and-development investment funding was demanded as the company geared up for the mid-2012 debut of the Model S (top) and readied its Fremont, Calif., plant. Tesla’s R&D costs more than tripled from a year earlier, to $52.5 million from $15.4 million.

While Musk’s claim that Tesla is negotiating a massive supplier, production or development deal with Toyota doesn’t make it so, it is more likely than not that what the 40-year-old chief executive said is accurate, because Tesla now is a public company and thus Musk is accountable for statements that could affect its stock price. Neither Musk nor the Tesla executive who spoke to AutoObserver on condition of anonymity would comment on the particulars regarding the negotiations. Tesla revealed in a regulatory filing two weeks ago that it had secured a three-year,$100-million contract to supply Toyota with electric motors and battery packs for the RAV4 EV sport utility vehicle that is to be launched in the U.S. next year. That deal adds to a previously secured $60 million contract for Tesla to supply the motors and batteries for the initial batch of 100 RAV4 EV prototypes.

Toyota, which owns a 2.9 percent stake in Tesla, builds the standard gasoline RAV4 SUV at a plant in Ontario, Canada. Tesla plans to use a portion of its 5.5 million-square-foot Fremont plant, which it bought from Toyota for $42 million last year, for production of the Model S and later the Tesla Model X battery-electric crossover. Part of the enormous factory could also be used to produce Toyota’s RAV4 EVs. Tesla’s chief value to Toyota is in its battery management and electric motor expertise, and by relying on it, Toyota can speed up its entry into the electric-drive market. The Japanese auto giant, which launched the best-selling hybrid Prius in 1999 and now has eight conventional hybrids in its Toyota and Lexus lineups, plans to launch a Prius V hybrid wagon this year, followed next year by a plug-in version of the standard Prius with up to 13 miles of all-electric range, as well as a tiny “city” battery-electric car based on the Scion iQ.

Model S devlopment program.jpg

“Best Quarter” Yet
The widening loss notwithstanding, Musk began Wednesday’s conference call with by characterizing the three months ending June 30 as the “best quarter in Tesla’s history” and disclosing the new negotiations with Toyota.  The company’s “retail strategy is going gangbusters,” he said. “We’ve opened two new stores that have had more than 200,000 visitors since opening. It’s just been tremendous across the board and with great momentum going into the third quarter. We’re super-excited.”

Asked if Toyota might be gravitating toward developing battery-electric vehicles (BEVs) in parallel with Tesla or using Tesla exclusively for BEV research and development, Musk said: “It’s hard to answer that question with a high degree of accuracy, but certainly if one looks at the objective actions that they’ve taken such as the recent $100 million deal and the fact we’re in discussions with them for a deal that is in the order of magnitude higher than that, you can never tell what will happen there. But certainly to judge from Toyota’s behavior it is extremely positive. I would expect a company like Toyota—which is gigantic, one of the largest companies in the world—to have multiple irons in the fire. But I think it could also be said that there’s no doubt that we’re one of the significant irons in that fire.”

In a letter to investors issued Wednesday, Tesla said it had met all of the milestones planned for the quarter in the development contract for the RAV4 EV’s full powertrain system. This drove record development services revenue of approximately $19 million for the second quarter. Tesla said it expects that the RAV4 EV development program, and the associated development services revenues, will be completed by early 2012. Thereafter, as the company has previously announced, it plans to begin shipping RAV4 EV production parts to Toyota. Toyota has announced that the RAV4 EV will be available in 2012. “Further details on the RAV4 EV will be provided directly by Toyota in the coming weeks,” the letter said.

October Test Drives
Word of a possible billion-dollar deal wasn’t the only surprise Musk had in store Wednesday. He also announced that Tesla was done with the alpha-testing phase of the Model S and was now “well into” the beta-testing phase. He said the beta Model S is “99 percent close to production design.” He compared it to beta versions of software, which have so few glitches in them that their manufacturers feel confident enough to release the versions before they have been perfected. After the beta version will come the “release candidate,” which Tesla considers a production-ready vehicle that continues to be subject to tweaking and minor changes.

Musk said that Tesla would soon be sending invitations to Model S customers to tour the Fremont plant during an Oct. 1 open house, where customers would have the opportunity to drive the beta vehicles. In the letter issued by the company shortly before the conference call, Tesla said that by the end of June, it had more than 5,300 reservations for the Model S, and through July, the number had grown to more than 5,600. The reservations rate has increased substantially in the last couple of quarters. The reservations require a minimum $5,000 refundable deposit, and thus far, “we have undertaken minimal marketing activities focused on selling Model S,” the company said.

Tesla continued to make substantial progress preparing the Fremont plant for producing the Model S during the second quarter, the company said in the letter. Almost all of the Model S vehicle manufacturing equipment has been specified and ordered. Some equipment has already arrived and is being installed, especially in the stamping, plastics and paint shops, the company said. The Schuler press, one of the largest hydraulic presses in the U.S., is now operational in manual mode, and robots have now been installed to move the stampings between each individual press station, Tesla said. Two other press lines are already fully operational in automatic dry-run mode.

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Highest Quarterly Revenue
Tesla’s second quarter revenue of $58 million was more than double the revenue the automaker earned in the second quarter of last year and was the highest quarterly revenue in the company’s history. Gross margin was more than 30 percent for the third quarter in a row. Tesla said that both of its production agreements with Daimler AG and its development services agreement with Toyota produced combined revenue of approximately $31 million in the period, the highest such figure to date. Powertrain-component-related sales accounted for just over $11 million for the quarter, as unit sales of the components for both the Smart ForTwo and the Mercedes-Benz A-Class were delivered according to Daimler’s demand schedule. Tesla said it expects to complete all deliveries to Daimler by the end of this year. The company also said it met all of the milestones planned for the quarter in the development contract with Toyota for the RAV4 EV’s full powertrain system. This drove record development services revenue of approximately $19 million for the second quarter.

At the beginning of June, Tesla successfully raised $231 million through a follow-on offering and concurrent private placements. This financing included a $41 million investment by Musk and $18 million investment from Blackstar, the investment arm of Daimler. During Q2, Telsa also drew down $32 million from its Department of Energy (DOE) loan facility. In all, the new capital increased Tesla’s cash resources on hand to $331 million. Combining this cash with the additional $331 million it has left to draw on its loan facility with the DOE, Tesla said it now has approximately $662 million in available capital resources. “We believe that these funds will be sufficient to develop Model S and Model X, based on our current plans,” the company said.

Strong Roadster Demand
Tesla said it continued to experience strong customer demand for the Roadster globally. During the second quarter, it reportedly delivered 190 Roadsters, representing unit growth of almost 35 percent from the same quarter last year and 31 percent growth from the prior quarter. The company said it generated over $27 million in Roadster-related revenue in the second quarter, up 44 percent from the same quarter last year, as the larger unit volumes were coupled with a slightly lower lease mix and higher service revenue.

Roadster sales in Europe and Asia continued to grow and international represented roughly half of the total Roadster deliveries. As of June 30, the company had delivered about 1,840 Roadsters worldwide. Automotive gross margin was at a record 22 percent, the company reported, primarily due to slightly higher average selling prices and ongoing cost improvement programs on the Roadster as compared to the prior quarter. Given the strong demand for its Roadsters, Tesla increased the program size to 2,500 vehicles, up from 2,400.

The company said it expects to build all remaining Roadsters by January 2012. It plans to sell the last of the North American Roadsters by early next year and to continue selling in Europe and Asia until inventory is fully depleted in 2012. “This transition is planned to mirror the geographic roll-out of deliveries for Model S, which will begin in North America, followed by Europe and then Asia,” Tesla said. “As we wind down our selling efforts on the Roadster in the United States through the balance of this year, we plan to transition our sales team to more active support of Model S.”

Scott Doggett:  is an AutoObserver.com Associate Editor.

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